Utah Medical Products, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Unless noted, dollar amounts are in thousands. UTMD manufactures and markets specialty medical devices, with operations in the U.S., Ireland, the U.K. and Australia.
Financial results and position
- Revenue: Net sales were $9.827 million, down 5.3% from $10.374 million in Q1 2013.
- Profit and margins: Gross profit was $6.050 million, down 3.7%; gross margin improved to 61.6% from 60.5%. Operating income was $3.843 million, down 1.2%, with operating margin up to 39.1% from 37.5%. Net income was $2.722 million, down 0.5%; net margin increased to 27.7% from 26.4%. Diluted EPS was $0.72 (unrounded $0.719), versus $0.73 ($0.728) a year earlier.
- Cash flow: Operating cash flow was $1.922 million, compared with $2.719 million. Capital expenditures were $658, including $550 for an Australian facility. UTMD repaid $1.012 million of debt. Cash increased $643 to $15.038 million.
- Liquidity and debt: Current assets were $26.332 million and current liabilities $8.546 million; working capital was $17.786 million. Bank debt principal totaled approximately $8.135 million at quarter-end, down during the quarter; repayment of existing loans is scheduled to be completed by April 2016. UTMD reported compliance with loan covenants.
- Other balance-sheet items: Total assets were $82.894 million, versus $80.711 million at year-end 2013. Inventories rose to $5.292 million from $4.704 million, partly reflecting completed BPM kits awaiting payment and shipment. Stockholders’ equity was $62.938 million.
Changes and management commentary
- Lower sales were concentrated in blood pressure monitoring kits sold to two international distributors; sales to those customers declined $634 year over year. The company attributed the stronger gross margin partly to lower sales of these comparatively low-margin kits.
- UTMD did not ship a completed $396 order to a Chinese distributor because payment had not been received. The distributor recommitted to pay in Q2, but management said collection remained uncertain. The delay also contributed to higher finished-goods inventory.
- U.S. domestic sales declined, which management associated in part with hospital procurement centralization and pressure to reduce use of specialized devices. U.K. subsidiary sales increased, while Australian sales rose in local currency but were roughly flat in U.S. dollars due to currency movements.
- Operating expenses decreased to $2.207 million from $2.392 million, primarily reflecting lower Australian expenses after UTMD began operating its Australian subsidiary directly. Management cautioned that this benefit may lessen as it adds staff and exchange rates change.
- Lower interest expense, reflecting reduced loan balances, also supported results. The company reported no material accounting policy changes and no subsequent events requiring disclosure.
Outlook, risks and contingencies
- Management said it remained on track with its 2014 objectives: integrate multinational operations, develop additional gynecology products, maintain operating performance, repay debt, continue dividends and consider share repurchases or accretive acquisitions. No numerical revenue or earnings guidance was provided.
- Management cited the U.S. medical-device excise tax, regulatory burdens and approval delays, hospital purchasing practices and group purchasing organizations, product liability exposure, distributor dependence, competition and key-employee retention as risks.
- Foreign currency movements affect reported results; UTMD said it manages currency exposure through local-currency operations and liquidity management rather than separate hedging transactions.
- The company reported no litigation it believed could materially affect financial results. Disclosure controls were deemed effective, with no material quarter-to-quarter change in internal controls reported.
Important facts for investors to verify
- Whether the Chinese distributor paid for the delayed $396 order and whether shipment occurred in Q2.
- Whether the two international BPM distributors’ later orders and demand translate into shipments and revenue, particularly given the missing 2014 forecast from the Chinese customer.
- Sales, margins and inventory trends as product mix changes, and the effect of foreign exchange and the Australian subsidiary’s added operating costs.
- Debt repayment progress, covenant compliance, and the timing and funding of dividends, facility spending or any potential acquisition.